Kaboom!

It’s what the character of Mark Baum says in The Big Short during a scene of a debate over whether subprime mortgages will cause Wall St. to melt down.

Kaboom is what I thought when I read Prosper would let go 28% of its staff a week ago, followed by news of the ouster of Lending Club’s CEO.

What’s going on? As I wrote at outset of the year, 2016 looks to be a year of consolidation. The last few years have been high growth years with startups in financial services looking to seeking to outwit banks and other traditional financial companies.

But the need for corporate governance, strong internal controls and the need to find your place within a complex and fragmented ecosystem is now more apparent than ever.

Until recently it seemed entrepreneurs and venture capital firms saw almost any revenue stream at a financial service provider as potential white space for a “disruptor” or more innovative startup.

Today many – especially those in the public markets – are seeing the market space as more crowded vs. wide open. You can’t just be a “me too” player in these markets, so the whole category is going to be given more scrutiny in terms of business models.

LendingClub news last week was, to be fair, less a macro story and about weak controls, disclosure as well as self-dealing by LendingClub’s CEO that didn’t sit well with its Board. The coverage by the Wall Street Journal tells the facts of the case well. Other articles have raised question of the sustainability of the business model or the marketplace lenders.

I think the Board acted quickly to show it saw a problem, and wanted to take swift action that was both necessary, but shows that they were not asleep at the wheel.

I hope LendingClub bounces back. Everyone loves a come back story, but for all startups out there, there is a cautionary tale here, just as in the case of Theranos. It takes more than just vision. You have to sweat the details, especially in financial services.

Marketplace Lenders – Will They Need To Become Banks?

2016 is far from the end of FinTech. But with so many “me too” players in alternative lending space, we’ll see needed consolidation in sectors like lending and investing.

To me, investing in the notes (or slices of loans) from marketplace lenders is similar to the causes of the last financial crisis,: loans sliced and diced; questionable assurances on the underlying risk.

Some have said that marketplace lenders will ultimately need to become banks, or regulated as carefully as them, which strikes me as wise given the recent headlines.

Focusing on origination (vs. recurring revenues) and/or market is a dangerous game to play.

Prosper?

What happened to Prosper? I was offered the opportunity to invest in them by buying out employees shares at a valuation of $1.8B, which I declined a few months ago since while at a discount to the private value of SoFi at over $4B, it seemed expensive.

I admire Ron Suber and Aaron Vermut for taking the early action to right size Prosper; for those keeping track, Morgan Stanley has now reduced the total market share these new alternative lenders might take from 20% to 10% of market by 2020 in its latest research.

Looking ahead, I expect that Prosper will prosper again after consolidation in the sector.

Like SoFi pivoting from a focus on student loans, Suber’s deal with BillGuard made sense for its plan to not just be a loan originator. But it’s tough going, with 28% of staff let go , including head of business development, as evidence of the headwinds.

Others are finding it hard to prosper in 2016. I learned last week the once high-flying UK marketplace lender, Funding Circle, has scaled back its U.S. ambitions.

A year ago, Funding Circle USA was planning to make acquisitions, expand its reach via partnerships and do a more internationally. Now its corporate development plans in the U.S are largely on hold. Growth in the U.S. has also hit a wall.

Sorry for all the bad news in this post. I’m still bullish on the opportunities in FinTech for those with a sound strategy and a partnership plan with incumbents, but it’s time to focus on serving your clients and not thinking about your “next round.”

Look for a some success stories to come in upcoming editions of The FinTech Blog.

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3 thoughts on “Kaboom!”

Hi Michael, really enjoyed reading the post! What are your thoughts on the retail investment space? The increase in “me-to” players is significantly saturating respective markets, so do you think having a unique business model will lead to a high chance of success for a company? I ask this because I work for a company, in the retail investment space, with completely different business model and in my opinion, is set to disrupt the investing space because of it.

Dimitri – I am a fan of firms like RobinHood that can help expand the market to more individuals. I certain agree having a business model that makes sense is critical. That’s one of the reasons I’m skeptical of the long-term ability of many of the “pure play” B2C automated investment services (aka Roboadvisors). Recent partnerships like UBS and SigFig show the way forward in retail investing for some segments but there’s multiple segments that can be served by different businesses. I’ve checked out UStockTrade. You have something interesting: by not focusing on just price, i.e. differentiating on T+0 vs. T+3 with faster settlement is a compelling idea. And great ideas come out of Boston (where I’m from originally), of course! – Michael